OREANDA-NEWS. Successful implementation of the peace agreement between Colombia's government and the Fuerzas Armadas Revolucionarias de Colombia (FARC) would provide benefits for the country's economy in the medium to long term, Fitch Ratings says. Near term, the agreement highlights the importance of rebuilding Colombia's revenue base in order to accommodate required investment without jeopardizing fiscal consolidation.

Yesterday's announcement brings the end of Colombia's half-century-old internal conflict within sight. After almost four years of negotiations, the Santos administration and the FARC have finalized agreements on five broad areas: comprehensive agrarian reform, political participation for former rebels, antidrug trafficking efforts, a cease fire and rebel demobilization, and victim reparations. Implementation of the peace agreement will be monitored by a local special commission with the participation of international observers.

In Fitch's view, the significant security improvements put in place by the Uribe and Santos administrations have already delivered a peace dividend for the economy in the short term. Investment and growth could increase over the medium term, as areas that were formerly in conflict zones attract investment in mining and agriculture. From the fiscal point of view, and in the context of a wider fiscal deficit, signing the peace treaty further underscores the importance of providing a policy response that supports fiscal consolidation while incorporating governmental commitments to successfully implement the agreement.

According to President Juan Manuel Santos, the government will request authorization from Congress to hold a plebiscite on the peace agreement, and then submit the agreement for electoral approval in early October. If the agreement passes, authorities would move forward with formal implementation. While the peace agreement is a shared objective of a majority of Colombians, the length of negotiations and some of the terms have proven divisive. Hence, increased political noise and a competitive campaign to win voter support are likely. Garnering support for the peace process and tax reform, while complementary, present political challenges for the government, especially given the tight legislative schedule.

We remain focused on the tax reform proposal that will be introduced later in the year. Fitch's base case is that the government will introduce and obtain congressional approval for revenue-positive tax reform by year-end 2016, regardless of progress on the peace agreement. It is difficult to judge the final form, but a net positive revenue measure and its successful implementation are critical to compensate for the loss of oil-derived revenues (from an already low revenue base) and to replace taxes that will expire in 2018.

On July 22, Fitch revised Colombia's Rating Outlook to Negative reflecting a large current account deficit, rising external indebtedness and a high government debt burden relative to rating peers. Colombia's Long-Term Foreign-Currency Issuer Default Rating of 'BBB' balances the country's flexible and credible policy framework, improved external buffers and a record of macroeconomic and financial stability against high commodity dependence, limited fiscal flexibility, and the structural constraints of low per capita GDP and weak governance indicators.